Wall Street Blame Rift May Blunt Impact of U.S. Crisis Panel

By Phil Mattingly and Robert Schmidt -
Dec 16, 2010

The partisan split on the federal
panel exploring the origins of the financial crisis may
undermine the impact of its findings on the banks, bond-rating
firms and regulators it investigated, legal scholars and former
national commission members said.

Democrats and Republicans on the Financial Crisis Inquiry
Commission, struggling for months to find consensus behind the
scenes, haven’t even been able to agree on whether to include
the phrases “Wall Street” and “shadow banking” in the final
report. The report is now scheduled to be published in January
and is likely to include dissents, FCIC members said yesterday.

The four Republicans on the 10-member panel made their
views public in a nine-page document yesterday, saying they
place much of the blame for the 2008 crisis on the government
and mortgage firms Fannie Mae and Freddie Mac rather than banks.

“To be successful, one of these commissions has to be 100
percent, or close to 100 percent, accurate in their findings,”
said Lance Cole, a Pennsylvania State University law professor
who served as a consultant to the Sept. 11 commission. “If
there is any split or any controversy about the underlying
facts, then it totally undermines their credibility.”

When it was created by Congress in 2009, the FCIC was
heralded by House Speaker Nancy Pelosi, a California Democrat,
as an effort to get a “detailed and clear-eyed examination” of
the worst economic collapse since the Great Depression and
“bring accountability” to the financial system.

Buffett and Blankfein

Former California treasurer Phil Angelides, 57, a Democrat,
was named to head the group. The panel held hearings on the role
of bond-rating firms including Moody’s Corp., on the failure of
New York-based investment bank Bear Stearns Cos. and on the
bailout of American International Group Inc., the New York-based
insurer. Chief executives including Warren Buffett and Lloyd Blankfein of Goldman Sachs Group Inc. testified for the panel.

The commission focused on Goldman Sachs for its role in
AIG’s troubles. Angelides and former Representative Bill Thomas,
the panel’s Republican vice chairman, also accused the firm, the
most profitable in Wall Street’s history, of engaging in a
document “dump” designed to hamper investigators. The
commission responded by issuing a subpoena for more records.

The unity in the efforts to pull information from Goldman
Sachs has broken down, commissioners said yesterday.

Early Optimism

One model for the FCIC was the panel that explored the 2001
terror attacks on New York and Washington, which had members of
both parties and reached a unanimous conclusion.

Bob Graham, 74, a Florida Democrat and former U.S. senator
who is an FCIC member, said he and his colleagues at first
expected to put partisan concerns aside. He said he thought
unanimity would be possible because the FCIC’s mandate was to
outline the causes of the crisis rather than debate
recommendations to Congress.

By this fall, he said, hopes of comity were over.

Commissioners have had “an increasingly strained
relationship and it appeared less likely that we were going to
get a unanimous assessment of what the historical facts were,”
said Graham, who also serves as co-chairman of the national
commission investigating the BP oil spill in the Gulf of Mexico.

Graham said the political process for selecting commission
members contributed to the problem. “You start off with people
whose loyalty is to the person who appointed them and generally
they were appointed because of their loyalty to that person or
party,” he said.

Word Ban

The divide intensified when Thomas proposed in the last few
weeks deleting a series of words Republicans thought were
pejorative or not precise enough to refer to a financial system
that included mortgage lending or insurance firms, for example.
Included in the proposal, according to Brooksley Born, a
Democrat on the panel, were the words “Wall Street,”
“deregulation” and “shadow banking.”

The proposal was defeated by a majority of the
commissioners, Born, 70, said in an interview.

Republicans said their decision to release initial findings
before the final report came after the commission, in a 6-4
vote, decided to limit to nine the number of pages each
commissioner could supply to the print edition of the final book
to express their views. Thus, Republican dissent would total a
maximum of 36 pages in a 500-page book.

Timing Dispute

The law setting up the commission called for it to release
its final report yesterday. Amid the disputes, Democratic
commissioners decided to delay the report for about a month.

In the preview of their findings, the Republican members
said yesterday that a “social policy” decision by the U.S. to
push affordable housing and fund it via Fannie Mae and Freddie
Mac was a recipe for disaster.

“The risk of a housing collapse was simply not
appreciated,” the four wrote. “Not by homeowners, not by
investors, not by banks, not by rating agencies and not by
regulators.”

Keith Hennessey, a Republican commissioner and the former
director of President George W. Bush’s National Economic
Council, said in a blog post yesterday that the Republican
outline was “not a report or a response” but a “primer on the
issues we think will be important to cover in the final report
of the commission.”

‘Comply With the Law’

The document was drafted to “comply with the law,”
according to Hennessey.

Representative John Larson, a Connecticut Democrat who led
the push to create the panel called the breakdown “truly
disappointing and disheartening.”

“If Americans from both political parties can come
together on anything, I would hope it would be this issue,”
Larson said in a statement yesterday.

To be sure, the commission has obtained thousands of
documents it hasn’t yet released, and those could eventually
contribute to public understanding of the financial meltdown.

Tucker Warren, the FCIC’s spokesman, said the final report
“will be the result of an investigation that includes over 700
interviews with witnesses in public and private, the review of
hundreds of thousands of documents and over 19 days of public
hearings.”

At the least, the report may be important for scholars,
said Robert Litan, vice president for research and policy at the
Kauffman Foundation in Kansas City, Missouri.

‘Statement for History’

“This is more or less a statement for history and maybe a
marker for what happens when we have the next crisis,” Litan, a
former Clinton administration budget official, said in a phone
interview.

The report also may play a role in shaping the overhaul of
Washington-based Fannie Mae and McLean, Va.-based Freddie Mac,
the government-owned mortgage companies that own or guarantee
more than half of U.S. home loans. It may affect the actual
implementation of the financial overhaul law by providing
“ammunition in filing comments and for potential litigation,”
Litan said.

Still, in the aftermath of a crisis that has resulted in
few arrests, the panel has done little to stoke public interest
by unveiling information in its hearings, said William Black, an
associate professor of economics and law at the University of
Missouri-Kansas City and a former U.S. bank regulator. In the
1930s, it was public theater and hard questioning by Ferdinand Pecora that pushed transformational reforms, Black said.

Clearing the Path

Pecora, who served as the chief counsel to the U.S. Senate
Committee on Banking and Currency, helped clear the political
path for legislative overhauls including the Glass-Steagall Act
and the Securities Act of 1933.

“They haven’t delivered any bombshells,” Cole, the Penn
State professor, said of the current commission. “There is a
necessity to provide some political theater if you want to get
results.”

In the end, the biggest obstacle faced by the commission in
its quest for impact may have been beyond its control. In July,
Congress enacted the Dodd-Frank regulatory overhaul, designed to
prevent another financial collapse.

“This commission’s timing is very bad,” said former
Senator Bob Kerrey, a Nebraska Democrat who served on the Sept.
11 Commission. “It’s not just that they are late, but the
moment is gone.”